Realty check: investors closeted in comfort zones

For the Indian real estate sector, 2012 was a year of cautious approach as stakeholders, including developers, investors and occupiers, began the year with an air of scepticism, a trait that continued through the year.

Rising inflation, rupee depreciation and increasing cost of capital added to the woes that affected demand as well as future supply dynamics of real estate in the country. Though the government failed on many fronts, and therefore, had no choice but to do its bit by announcing new policies and reforms, mostly in the second half of the year, there was limited impact of these measures within this year. Many new projects were launched in the last few years, I expect most to be completed in 3-5 years. We should witness another correction at that time before the uptrend begins again.

Capitalising on Opportunities

The falling global economy, reduced GDP against projection and heightened inflation have disrupted cash inflow in the market. Fiscal deficit and interest rates were high while the rupee depreciated. All this did not bode well for any industry, especially real estate.
Developers were reeling under high debt with limited funding options for development purpose. However, there was a certain vibrancy exhibited by investors who capitalised on opportunities available in the market. Even foreign direct investment saw an increase in the real estate sector. I expect the global economy to stabilise next year.

Investments: Entries & Exits

The year 2012, and very likely 2013, could be a year of exits. Corporate, developers and investors decided to exit non-core or unviable projects across the country. All those developers who build their land banks in locations far from their bases in their bid to go national between 2006 to 2008, followed by investors, took a conscious call to retract and concentrate their activities within the areas of comfort moving only as far as the peripheral locations. This move resulted in transaction of land banks across many key markets. Investors are also under pressure to exit such investments, some even winding up local offices and handing it over to existing local fund managers to look after or monetise their assets.

New investments have largely gone for residential developments in key cities like NCR, Mumbai, Pune and Bangalore. This was largely in green field or brown field projects. Debt structures with equity kind of assured returns continued as the flavour of the market. NBFC’s also made the most of the market. Few sensing opportunity in the hospitality, healthcare and education sector have taken the off-beat path cautiously. Sale of industrial parks and IT SEZs by global investors was the highlight of the year, crossing 10 million sft of divestment by developers.

Residential Differentiation

Interest rates remained stable, but on the higher side in 2012, which affected both developers as well as end-user purchasers. Developers, who were reeling under aspects like high debt, high cost of servicing debt, increased cost of construction, and restrained demand from end-users, were forced to maintain the prices rather than reduce it. Thus, they adopted innovative solutions to increase profitability by adopting measures as increasing operational efficiencies, re-packaging offerings, attractive schemes and targeting HNIs and customising offerings as per buyers’ preferences. Majority of new launches were aligned to end user and investor taste. On the one hand, residential units became smaller with no frills to appeal to the masses, on the other, a lot of branding is being done to attract and differentiate residential developments. Tall, green, designer etc are the signs of competitive environment.

Commercial Leasing Rebound

The commercial office market in India witnessed downward growth due to global market uncertainties. With many companies – global and Indian – revisiting their growth expansion plans, resulting in a downward net absorption trend in all major cities. Net absorption in CBD and prime non-CBD locations saw a drop in the range of 22-23 per cent compared to the last year, though it is likely to remain stable next year.

Multinationals eyeing India will be keen on leased spaces, especially in IT parks and SEZs. This should force developers to focus more on ‘building’ rather than selling. Substantial supply is expected in 2013. Attractive investment opportunities across cities and micro markets still exist as yields are still very appealing, since they are amongst the highest globally. Both occupiers with substantial cash reserves as well as funds interested in pre-leased assets are expected to keep the momentum in sales transactions as valuations look quite attractive, especially in cities such as Mumbai where commercial office spaces are at a substantial discount compared to residential assets within the same locations. The overall scenario ahead is not expected to change drastically in 2013, but I still expect business to come on track. While 2012 was the year of correction, 2013 is likely to see the revival of growth.

The writer is Executive Managing Director, South Asia, Cushman & Wakefield.